Investors cautious ahead of big data week

10.12 AEDT, Monday 5 November 2012

Investors cautious ahead of big data week

By Ric Spooner (Chief Market Analyst, CMC Markets)

Our market looks like opening pretty much unchanged on last week’s close despite a 1% decline in US markets on Friday. This partly reflects the fact that the Australian market fell quite heavily on Thursday so Friday’s US move represents something of a catch up.

Local markets are also likely to be supported by the news that China’s services PMI improved to 55.5 and by this morning’s news of Westpac’s cash earnings growth of 5% in F12. This result will be heartening for investors looking at banks and defensive stocks with high yields and some earnings growth as a viable alternative to the dwindling after tax yields on offer from fixed interest investments. A services PMI reading in the mid 50’s is another piece of data adding to a picture of stabilizing growth in China’s economy.

Friday’s news of a 171,000 increase in US job numbers during October will further reduce the possibility of another rate cut by the RBA tomorrow. The decision tomorrow could go either way. However US jobs growth has averaged 173,000 over the past four months. This is consistent with a scenario of moderate growth in the world’s largest economy and with China showing signs of basing at around current levels; the Bank may prefer to wait for more evidence of weakness before moving to cut local rates further.

Today’s retail sales figure will provide further insight into the mood of the domestic consumer. Retail sales have not done much better than the rate of inflation in Australia over recent months. Trend growth in retail sales is likely to continue painting a picture of consumer caution for a while but this may not change RBA thinking unless there is significant deterioration from recent levels.

Technical analysis suggests that the S&P/ASX 200 index is currently correcting the rally from early September’s lows at 4261. Under this scenario, further downside movement in the index is likely to be limited with support at around 4420. However, a move under the peak at 4408 would change this outlook, suggesting that we are correcting the whole of the major move from the June lows.

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